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Rocket Stock or Dud?

The bigger they are, the harder they (might) fall.

"The bigger they are, the harder they fall." It's the worst nightmare of every investor in today's market -- buying a rocket stock just before it takes a nosedive.

Now I readily admit that sometimes, stocks rise for a reason. But sometimes, the rise becomes the reason. No matter how often we caution them not to, investors do have a habit of buying "hot" stocks and trusting momentum to keep 'em moving up.

Problem is, if the price goes up too much, even a great company can turn into a lousy investment (and if the company was less than great in the first place...). Below I list a few stocks that may have done just this. These stocks, according to the smart folks at finviz.com, have more than doubled over the past year and just might be ripe to fall back to earth.

Companies are selected by screening for 100% and higher price appreciation over the last 12 months on finviz.com. Five stars = highest possible CAPS rating; one star = lowest. Current pricing provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Question: What do iron mining, searching for a cure for cancer, and seismic oil exploration have in common? One answer might be that they're all a bit of a gamble. Another -- that the companies behind these ideas are some of the hottest stocks on the Street.

And maybe, rightly so. Shares of Cliffs Natural Resources have more than doubled over the past year, and CAPS member gtucker7848 thinks this is only the beginning, calling Cliffs Natural a "great play on slow, steady international recovery." Even as revenues slipped into decline at mining giants Vale(Nasdaq: VALE) and Rio Tinto(NYSE: RTP), Cliffs managed to triple its revenues last quarter.

A stub of Delcath will set you back 150% more today than it cost a year ago. CAPS member jimswarthout calls the company's Delcath PHP System a "unique drug delivery system" and is betting on a positive outcome from the device's Phase 3 clinical trials. (Nor is he the only one. Delcath has partnered with the National Cancer Institute on the device.)

Neither of these stocks, however, enjoys the sky-high approval ratings of this week's top stock. BP's (NYSE: BP) Gulf of Mexico "oopsie" notwithstanding, investors still seem to think there's a need for oil, and a future for the companies that help find it -- companies like OYO Geospace. Let's find out why.

The bull case for OYO GeospaceWho is OYO? Well, it's one of the companies that helps BP figure out where to dig for black gold, of course. CAPS member 4thRockFool introduced us to OYO last year as a provider of "seismic services that can help its clients get more oil out of existing fields" and "a leader in 4D technology."

Why is that important? Quoting from a 2007 article in SmartMoney, CAPS All-Star Gtrinvestor argued: "If you look at the oilfields around the world, you're getting 30% to 35% of the oil out and leaving the rest of it behind. OYO's technology gives you a much higher resolution picture that allows you to tap the stuff you were missing. The easiest oil to find is the oil you've missed in your own field."

Fellow All-Star investor OrwellWasRight agrees that this is a pretty good idea , exclaiming: "any company that increases the percentage of recoverable goo to the extent these guys do, is likely to make a mint."

In fact, they already are.

Drilling for profitsGranted, with a stock price more than 105 times the amount of its reported profits, OYO doesn't look like a very profitable operation -- at least, not at first glance. Fortunately, you don't need a seismograph to figure this one out. An examination of OYO's publicly available cash flow statement will suffice.

Despite reporting a bare $3.1 million in "net income" for the past 12 months, the truth is that OYO is much, much more profitable than it lets on. The company has generated $16.4 million in free cash flow over the past nine months alone, putting it on track for as much as $21.8 million by year-end, at the current run-rate.

What this works out to, then, is a stock priced at less than 15 times free cash flow. A business that, its cheapness notwithstanding, is going great guns, taking in 31% more revenues last quarter than in the previous year's Q3, and more than doubling its reported profits. A company that most analysts expect to keep on growing at as much as 37% per year over the next five years.

"Rocket stock" it may be, but the more I look at OYO Geospace today, the more I'm convinced it's got plenty of fuel left in the tank. But that's just my opinion.

OYO Geospace is aMotley Fool Hidden Gemsrecommendation, butFool contributorRich Smithdoes not own shares of any company named above. You can find Rich on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 569 out of more than 165,000 members. The Fool has adisclosure policy.

Author

I like things that go "boom." Sonic or otherwise, that means I tend to gravitate towards defense and aerospace stocks. But to tell the truth, over the course of a dozen years writing for The Motley Fool, I have covered -- and continue to cover -- everything from retailers to consumer goods stocks, and from tech to banks to insurers as well. Follow me on Twitter or Facebook for the most important developments in defense & aerospace news, and other great stories besides.